A Matter of Trust
Robert O'Riordan debates the great importance of trust when it comes to making decisions about companies and whether or not it is wise to invest in them
Dictum meum pactum (which translates as 'my word is my bond') has always been the motto of the London Stock Exchange. Trust was the oil that greased the Stock Exchange engine, which arguably stood at the heart of the capitalist machine.
In very practical terms, participants on the floor of the Exchange had to stand behind verbal contracts in the gap between the bargain being struck and the written contract being issued. Of course, there was sharp practice, especially in the earlier days, and some prospectuses failed to live up to their promise. However, in the days before comprehensive regulation, reputation was all - and establishing a good reputation was the key to success. Reputations were hard-won by firms over many generations.
The challenge for the consumer now, as it was back then, is to weed out those who give the appearance of being trustworthy from those who truly are. The nature of a highly competitive financial sector today means that much can hang on a marketing promise. Promises are sometimes madein the light of past experience, rather than a realistic view of the future and, certainly in some ways, it is ironic that past performance figures hold so much sway with advisors and individual direct investors
when it comes to making investment decisions; the past is indeed not necessarily a reliable indicator of the future.
As there can be a delay between when a promise is made and its actual delivery, consumers need to be able to make a shrewd assessment of both the implicit and explicit value of a marketing promise.
Risk is ever present in investment - but trying to achieve a degree of certainty, or at least arriving at a considered view of the nature of the risks, is important.
This is maybe where trust comes back into the equation, along with reputation and word-of-mouth recommendation. A good reputation is priceless and, should an organisation that has carefully built up a reputation, often over many generations, fail to deliver on its promise, then the hard-won trust is quickly lost. Perhaps the most difficult challenge is to know whether an organisation that has a good reputation will continue to be trustworthy as things do change. As well as being vigilant, buyers would be wise to look to the long term and temper their expectations. Of course, common sense screams that if something looks too good to be true, then it probably is; experience can, on some occasions, be bought at an extremely hefty price.
The regulatory structure provided by the Financial Services Authority is valuable but it does not amount to a guarantee. When it comes to one's personal finances, trusting in providence alone is not enough. Instead, careful research, plus a measured assessment of expectations and risk and a sceptical attitude can pay dividends.
Robert O'Riordan is responsible for liaising with investment trust boards at Baillie Gifford and for communications with shareholders.
Back to top
